[COAST NATIONAL BANK LOGO]
2000 ANNUAL REPORT
Statement of Vision, Values and Mission
It is the vision of Coast National Bank to be the preferred provider of financial services on the Central Coast. We will accomplish this by remaining true to the "Customer-First" concept on which the Bank was founded.
Our directors, managers and staff understand that "Customer-First" banking means that we will be flexible, timely, professional and personal in the delivery of our products and services. We will remain committed to the highest level of integrity and ethical conduct. These values represent the formula for safety, soundness and success.
Our mission is to offer personalized banking services to consumers and small business owners with constant attention paid to safety, soundness and exceptional returns for our shareholders. In our relationships with our customers, we will exhibit our commitment to caring, quality service while supporting the communities we serve. Finally, we will provide a satisfying work environment for our employees so that they may enjoy the opportunity to grow personally and professionally.
Dear Shareholders, Customers and Friends:
Coast National Bank ended the year 2000 with another year of record performance, once again demonstrating the success of the bank's commitment to provide responsive, personal service to Central Coast residents and business owners.
Over the past 12 months, total assets grew from $76,516,832 to $96,845,862. Deposits ended the year at $89,950,004, a 27 percent increase, and loans totaled $62,120,742, a 35 percent increase. Most importantly, Coast National Bank's loan portfolio remains rated as excellent.
I am pleased to report that the bank recorded a net income, after taxes, of $643,834, compared to the prior year of $340,955. The good news is that the bank has recaptured all of the organizational expenses and original operating losses; the bad news is that in September 2000, we became fully taxable.
In July 2000, the bank made a major commitment to the expansion of its government guaranteed programs by hiring Davina Saunders as Senior Vice President and Manager of Coast National Bank's Small Business Lending Center. This department has already achieved exceptional results and will be a major profit center in 2001 and beyond.
On December 18, 2000, the bank received final approval from the Architectural Review Commission for the new head office building to be built next to the Jack House in San Luis Obispo. Construction documents are underway and ground breaking is scheduled for mid-year. Please stop by the San Luis Obispo branch to view the color rendering and discuss the building's progress with us.
Finally, the Board of Directors will be asking the shareholders to approve the formation of a bank holding company at this year's annual shareholder's meeting. The holding company, Coast Bancorp, will provide the Board of Directors and management greater flexibility in meeting the financial needs of the bank's customers.
My sincerest thanks to all of you for your continued support, which has allowed Coast National Bank to set the standard for new banks in San Luis Obispo County.
Sincerely,
/s/ Jack C. Wauchope
Jack C. Wauchope
Chairman of the Board
President and Chief Executive Officer
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Net Loan Growth
[Net Loan Growth Chart]
Asset Growth
[Asset Growth Chart]
New Income
[Net Income Chart]
2
Statements of Financial Condition
December 31, 2000 and 1999
| | 2000 | 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||||
| Cash and due from banks | $ | 6,043,231 | $ | 3,777,734 | ||||||
| Federal funds sold | 3,500,000 | 6,000,000 | ||||||||
| TOTAL CASH AND CASH EQUIVALENTS | 9,543,230 | 9,777,734 | ||||||||
| Interest-bearing deposits | 200,000 | — | ||||||||
| Investment Securities: | ||||||||||
| Securities held to maturity | 997,662 | 3,002,194 | ||||||||
| Securities available for sale | 19,967,986 | 15,768,600 | ||||||||
| TOTAL INVESTMENT SECURITIES | 20,965,648 | 18,770,794 | ||||||||
| Loans: | ||||||||||
| Commercial | 13,262,406 | 10,602,243 | ||||||||
| Real estate—construction | 6,261,763 | 3,489,882 | ||||||||
| Real estate—other | 23,430,266 | 23,173,889 | ||||||||
| Consumer | 19,166,309 | 8,727,155 | ||||||||
| TOTAL LOANS | 62,120,742 | 45,993,169 | ||||||||
| Net deferred loan fees | (220,717 | ) | (208,070 | ) | ||||||
| Allowance for credit losses | (700,000 | ) | (400,000 | ) | ||||||
| NET LOANS | 61,200,027 | 45,385,099 | ||||||||
| Premises and equipment | 3,610,995 | 1,689,592 | ||||||||
| Accrued interest receivable | 815,410 | 593,753 | ||||||||
| Deferred Taxes | 189,000 | 163,250 | ||||||||
| Federal reserve bank stock, at cost | 171,950 | 136,610 | ||||||||
| Other assets | 149,602 | — | ||||||||
| TOTAL ASSETS | $ | 96,845,862 | $ | 76,516,832 | ||||||
| Liabilities and Stockholders' Equity | ||||||||||
| Deposits: | ||||||||||
| Noninterest-bearing demand | $ | 21,397,548 | 15,977,491 | |||||||
| Money market and NOW | 29,631,840 | 22,390,911 | ||||||||
| Savings | 3,190,881 | 3,137,193 | ||||||||
| Time deposits of $100,000 or more | 19,998,497 | 16,136,410 | ||||||||
| Other time deposits | 15,731,238 | 13,022,927 | ||||||||
| TOTAL DEPOSITS | 89,950,004 | 70,664,932 | ||||||||
| Other liabilities | 531,611 | 355,398 | ||||||||
| TOTAL LIABILITIES | 90,481,615 | 71,020,330 | ||||||||
| Commitments and contingencies—Note #11 | ||||||||||
| Stockholders' Equity | ||||||||||
| Common stock $5 par value; 1,000,000 shares authorized; issued and outstanding; 627,000 in 2000 and 625,800 in 1999 | 3,135,000 | 3,129,000 | ||||||||
| Additional paid-in capital | 3,135,000 | 3,129,000 | ||||||||
| Retained earnings (deficit) | 116,325 | (527,509 | ) | |||||||
| Accumulated other comprehensive income—net unrealized (losses) gains on available-for-sale securities | (22,078 | ) | (233,989 | ) | ||||||
| TOTAL STOCKHOLDERS' EQUITY | 6,364,247 | 5,496,502 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 96,845,862 | $ | 76,516,832 | ||||||
The accompanying notes are an integral part of these financial statements.
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For the years ended December 31, 2000 and 1999
| | 2000 | 1999 | ||||||
|---|---|---|---|---|---|---|---|---|
| INTEREST INCOME | ||||||||
| Interest and fees on loans | $ | 5,326,746 | $ | 3,648,193 | ||||
| Interest on investment securities | 1,070,091 | 1,113,892 | ||||||
| Interest on federal funds sold | 330,992 | 338,104 | ||||||
| Other interest income | 17,112 | 12,343 | ||||||
| TOTAL INTEREST INCOME | 6,744,941 | 5,112,532 | ||||||
| INTEREST EXPENSE | ||||||||
| Interest on money market and NOW accounts | 925,980 | 625,401 | ||||||
| Interest on savings | 94,040 | 83,332 | ||||||
| Interest on time deposits | 1,817,524 | 1,349,797 | ||||||
| Interest on other borrowings | 20,024 | 3,408 | ||||||
| TOTAL INTEREST EXPENSE | 2,857,568 | 2,061,938 | ||||||
| NET INTEREST INCOME | 3,887,373 | 3,050,594 | ||||||
| Provision for credit losses | 300,000 | 183,314 | ||||||
| NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 3,587,373 | 2,867,280 | ||||||
| NONINTEREST INCOME | ||||||||
| Service charges on deposits accounts and other noninterest income | 166,883 | 145,200 | ||||||
| Gain on sale of securities | 2,963 | 8,616 | ||||||
| TOTAL NONINTEREST INCOME | 169,846 | 153,816 | ||||||
| NONINTEREST EXPENSE | ||||||||
| Salaries and benefits | 1,549,160 | 1,404,184 | ||||||
| Net occupancy expenses | 175,842 | 234,804 | ||||||
| Equipment and equipment expenses | 166,805 | 134,392 | ||||||
| Other expenses | 1,119,078 | 905,961 | ||||||
| TOTAL NONINTEREST EXPENSE | 3,010,885 | 2,679,341 | ||||||
| INCOME BEFORE INCOME TAXES | 746,334 | 341,755 | ||||||
| Income taxes | 102,500 | 800 | ||||||
| NET INCOME | $ | 643,834 | $ | 340,955 | ||||
| Per Share Data | ||||||||
| Net income—basic | $ | 1.03 | $ | .55 | ||||
| Net income—diluted | $ | 1.00 | $ | .53 | ||||
The accompanying notes are an integral part of these financial statements.
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Statement of Changes in Stockholders' Equity
For the years ended December 31, 2000 and 1999
| | Shares Outstanding | Common Stock | Additional Paid-In Capital | Comprehensive Income | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income | Total | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 1999 | $ | 625,000 | $ | 3,125,000 | $ | 3,125,000 | $ | (868,464 | ) | $ | 37,541 | $ | 5,419,077 | ||||||||||
| Exercise of stock options | 800 | 4,000 | 4,000 | 8,000 | |||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||
| Net income | $ | 340,955 | 340,955 | 340,955 | |||||||||||||||||||
| Unrealized losses on available-for-sale securities | (262,914 | ) | (262,914 | ) | (262,914 | ) | |||||||||||||||||
| Less reclassification adjustments for gains included in net income | (8,616 | ) | (8,616 | ) | (8,616 | ) | |||||||||||||||||
| Total comprehensive income | $ | 69,425 | |||||||||||||||||||||
Balance, December 31, 1999 | 625,800 | 3,129,000 | 3,129,000 | (527,509 | ) | (233,989 | ) | 5,496,502 | |||||||||||||||
| Exercise of stock options | 1,200 | 6,000 | 6,000 | 12,000 | |||||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||
| Net income | $ | 643,834 | 643,834 | 643,834 | |||||||||||||||||||
| Unrealized losses on available-for-sale securities | 214,874 | 214,874 | 214,874 | ||||||||||||||||||||
| Less reclassification adjustments for gains included in net income | (2,963 | ) | (2,963 | ) | (2,963 | ) | |||||||||||||||||
| Total comprehensive income | $ | 855,745 | |||||||||||||||||||||
| Balance, December 31, 2000 | $ | 627,000 | $ | 3,135,000 | $ | 3,135,000 | $ | 116,325 | $ | (22,078 | ) | $ | 6,364,247 | ||||||||||
The accompanying notes are an integral part of these financial statements.
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For the years ended December 31, 2000 and 1999
| | 2000 | 1999 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| OPERATING ACTIVITIES | ||||||||||||
| Net Income | $ | 643,834 | $ | 340,955 | ||||||||
| Adjustments to reconcile net income to net cash provided by operations: | ||||||||||||
| Depreciation and amortization | 199,757 | 192,296 | ||||||||||
| Provision for loan losses | 300,000 | 183,314 | ||||||||||
| Realized gains in available-for-sale securities | (2,963 | ) | (8,616 | ) | ||||||||
| Deferred taxes | (189,000 | ) | — | |||||||||
| Increase in accrued interest receivable | (221,657 | ) | (207,200 | ) | ||||||||
| Net change in other assets and other liabilities | 163,325 | (52,239 | ) | |||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 893,296 | 448,510 | ||||||||||
| INVESTING ACTIVITIES | ||||||||||||
| Net increase in loans | (16,114,928 | ) | (11,195,163 | ) | ||||||||
| Net increase in interest-bearing deposits | (200,000 | ) | — | |||||||||
| Purchase of available-for-sale securities | (8,986,172 | ) | (11,003,357 | ) | ||||||||
| Purchase of held-to-maturity securities | (996,875 | ) | (5,019,375 | ) | ||||||||
| Purchase of federal reserve stock | (8,700 | ) | (1,850 | ) | ||||||||
| Proceeds from sale of available-for-sale securities | 2,002,963 | 2,013,125 | ||||||||||
| Proceeds from maturities of available-for-sale securities | 3,000,000 | 5,000,000 | ||||||||||
| Proceeds from maturities of held-to-maturity securities | 3,000,000 | 4,000,000 | ||||||||||
| Purchase of premises and equipment | (2,121,160 | ) | (352,970 | ) | ||||||||
| NET CASH USED IN INVESTING ACTIVITIES | (20,424,872 | ) | (16,559,590 | ) | ||||||||
| FINANCING ACTIVITIES | ||||||||||||
| Net increase in demand deposits and savings accounts | 12,714,674 | 2,542,838 | ||||||||||
| Net increase in time deposits | 6,570,398 | 4,005,491 | ||||||||||
| Proceeds from exercise of stock options | 12,000 | 8,000 | ||||||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 19,297,072 | 6,556,329 | ||||||||||
| DECREASE IN CASH AND CASH EQUIVALENTS | (234,504 | ) | (9,554,751 | ) | ||||||||
| Cash and cash equivalents beginning of period | 9,777,734 | 19,332,485 | ||||||||||
| Cash and cash equivalents at end of period | $ | 9,543,230 | $ | 9,777,734 | ||||||||
| Supplemental disclosure of cash flow information | ||||||||||||
| Interest paid | $ | 2,821,440 | $ | 2,051,461 | ||||||||
| Income taxes paid | $ | 220,800 | $ | 800 | ||||||||
The accompanying notes are an integral part of these financial statements
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Note #1 Summary of Significant Accounting Policies
Nature of Operations
The Bank has been organized as a single operating segment and operates four branches in San Luis Obispo, Arroyo Grande, Morro Bay, and Los Osos, California. The Bank's primary source of revenue is providing loans to customers, who are predominantly small and middle-market businesses and individuals.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Presentation of Cash Flows
For the purposes of reporting cash flows, cash and cash and cash equivalents includes cash, noninterest-earning deposits and federal funds sold. Generally, federal funds are sold for one day periods.
Cash and Due From Banks
Banking regulations require that all banks maintain a percentage of their deposits as reserves in cash or on deposit with the federal reserve bank. The Bank complied with the reserve requirements as of December 31, 2000.
The Bank maintains amounts due from banks which exceed federally insured limits. The Bank has not experienced any losses in such accounts.
Investment Securities
Bonds, notes, and debentures for which the Bank has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.
Investments not classified as trading securities nor as held to maturity securities are classified as available-for-sale securities and recorded at fair value. Unrealized gains or losses on available-for-sale securities are excluded from net income and reported as an amount net of taxes as a separate component of other comprehensive income included in shareholders' equity. Premiums or discounts on held-to-maturity and available-for-sale securities are amortized or accreted into income using the interest method. Realized gains or losses on sales of held-to-maturity or available-for-sale securities are recorded using the specific identification method.
Loans and Interest on Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.
The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received.
7
For impairment recognized in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 114. Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, the entire change in the present value of expected cash flows is reported as either provision for loan losses in the same manner in which impairment initially was recognized, or as a reduction in the amount of provision for loan losses that otherwise would be reported. The Bank had no impaired loans during 2000 or 1999.
Provision and Allowance for Credit Losses
The allowance for credit losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations, that may affect the borrow's ability to repay, the estimated value of any underlying collateral, and current economic conditions.
Premises and Equipment
Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which ranges from three to ten years for furniture and fixtures and forty years for buildings. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term. Whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred.
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Comprehensive Income
Beginning in 1998, the Bank adopted SFAS No. 130, "Reporting Comprehensive Income", which requires the disclosure of comprehensive income and its components. Changes in unrealized gains (losses) on available-for-sale securities net of income taxes is the only component of accumulated other comprehensive income for the Bank.
Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby letters of credit, see Note #11. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received.
Earnings Per Shares (EPS)
Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The bank has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options is measured
8
as the excess, if any, of the quoted market price of the Bank's stock at the date of the grant over the amount an employee must pay to acquire the stock. The pro forma effects of adoption are disclosed in Note #9.
Current Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This new standard was originally effective for 2000. In June 1999, the FASB issued SFAS No. 137, "Accounting Derivatives Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133". This Statement establishes the effective date of SFAS No. 133 for 2001. In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities". This Statement amends SFAS No. 133 and is not expected to have a material impact on the Bank's financial statements.
Reclassification
Certain reclassifications have been made in the 1999 financial statements to conform to the presentation used in 2000. These classifications are of a normal recurring nature.
Note #2 Investment Securities
Amortized cost and market values of securities are as follows:
| | December 31, 2000 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |||||||||
| Held-to-maturity securities: | |||||||||||||
| U.S. Treasury obligations | $ | 997,662 | $ | 3,860 | $ | — | $ | 1,001,522 | |||||
| Available-for-sale securities: | |||||||||||||
| U.S. Treasury obligations | $ | 8,989,994 | $ | 32,444 | $ | — | $ | 9,022,438 | |||||
| U.S. Agency obligations | 11,000,071 | — | (54,523 | ) | 10,945,548 | ||||||||
| $ | 19,990,065 | $ | 32,444 | $ | (54,523 | ) | $ | 19,967,986 | |||||
| | December 31, 1999 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Market Value | |||||||||
| Held-to-maturity securities: | |||||||||||||
| U.S. Agency obligations | $ | 3,002,194 | $ | — | $ | (11,394 | ) | $ | 2,990,800 | ||||
| Available-for-sale securities: | |||||||||||||
| U.S. Treasury obligations | $ | 1,000,515 | $ | — | $ | (1,115 | ) | $ | 999,400 | ||||
| U.S. Agency obligations | 15,002,075 | — | (232,875 | ) | 14,769,200 | ||||||||
| $ | 16,022,590 | — | $ | (233,990 | ) | $ | 15,768,600 | ||||||
Gross realized gains on sales of available-for-sale securities were $3,900 in 2000 and $8,616 during 1999. Gross realized losses on sales of available-for-sale securities were $937 in 2000.
Securities with a carrying value of $1,000,000 and a fair value of $982,605 and $995,900 at December 31, 2000 and 1999, respectively, were pledged to secure public monies as required by law.
The Amortized cost and fair values of investment securities available-for-sale and held-to-maturity at December 31, 2000, by expected maturity are shown below. Expected maturities will differ from
9
contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | Securities Available-for-Sale | Securities Held-to-Maturity | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||
| Due in one year or less | $ | 15,990,065 | $ | 16,005,431 | $ | 997,662 | $ | 1,001,522 | ||||
| Due from one year to five years | 4,000,000 | 3,962,555 | — | — | ||||||||
| $ | 19,990,065 | $ | 19,967,986 | $ | 997,662 | $ | 1,001,522 | |||||
Note #3 Loans
The Bank's loan portfolio consists primarily of loans to borrowers within San Luis Obispo, California and its surrounding communities. Although the Bank seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Bank's market area and, as a result, the Bank's loan and collateral portfolios are, to some degree, concentrated in those industries.
As described in Note #11, these financial statements do not reflect other various commitments to extend credit or letters of credit, which arise in the normal course of business.
A summary of the changes in the allowance for credit losses follows:
| | 2000 | 1999 | |||||
|---|---|---|---|---|---|---|---|
| Balance, beginning of year | $ | 400,000 | $ | 225,000 | |||
| Provision for credit losses | 300,000 | 183,314 | |||||
| Loans charged off | — | (8,314 | ) | ||||
| Balance, end of year | $ | 700,000 | $ | 400,000 | |||
The Bank did not have any impaired loans during 2000 and 1999.
Note #4 Premises and Equipment
A summary of premises and equipment as of December 31, 2000 and 1999, follows:
| | 2000 | 1999 | |||||
|---|---|---|---|---|---|---|---|
| Land | $ | 2,047,962 | $ | 599,175 | |||
| Building | 1,045,634 | 451,063 | |||||
| Leasehold improvements | 269,159 | 267,919 | |||||
| Furniture, fixtures and equipment | 739,470 | 663,335 | |||||
| 4,102,225 | 1,981,492 | ||||||
| Less: Accumulated depreciation and amortization | (491,230 | ) | (291,900 | ) | |||
| $ | 3,610,995 | $ | 1,689,592 | ||||
The Bank has entered into leases for its branches and operating facilities, which expire at various dates through 2003. These leases include provisions for periodic rent increases as well as payment by the lessee of certain operating expenses. Rental expense relating to these leases were approximately $92,000 in 2000 and $109,000 in 1999.
10
The approximate future minimum annual payments for these leases by year are as follows:
| Year | Amount | ||
|---|---|---|---|
| 2001 | $ | 80,406 | |
| 2002 | 67,501 | ||
| 2003 | 7,091 | ||
| 154,998 | |||
The minimum rental payments shown above are given for the existing lease obligations and are not a forecast of future rental expense.
Note #5 Deposits
At December 31, 2000, all time deposits were scheduled to mature in 2001, except for $878,381 that matures in one to five years.
Note #6 Income Taxes
The provisions for income taxes included in the statements of income consist of the following:
| | 2000 | 1999 | ||||||
|---|---|---|---|---|---|---|---|---|
| Current | ||||||||
| Federal | $ | 211,500 | $ | — | ||||
| State | 80,000 | 800 | ||||||
| 291,500 | 800 | |||||||
| Deferred | 22,000 | 136,000 | ||||||
| Net Change in Valuation Allowance | (211,000 | ) | (136,000 | ) | ||||
| $ | 102,500 | $ | 800 | |||||
Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The Bank's principal timing differences are from operating loss carryforwards, loan loss provision accounting, and depreciation differences.
The following is a summary of the components of the net deferred tax asset accounts recognized in the accompanying statements of financial condition:
| | 2000 | 1999 | ||||||
|---|---|---|---|---|---|---|---|---|
| Deferred Tax Assets: | ||||||||
| Organization Costs | $ | 35,000 | $ | 58,000 | ||||
| Allowance for credit losses | 142,000 | 18,000 | ||||||
| Net operating loss carryforwards | — | 148,000 | ||||||
| Other assets/liabilities | 26,000 | 12,000 | ||||||
| 203,000 | 236,000 | |||||||
| Valuation Allowance | — | (211,000 | ) | |||||
| Deferred Tax Liabilities: | ||||||||
| Premises and equipment due to depreciation difference | $ | (14,000 | ) | $ | (25,000 | ) | ||
| Net Deferred Tax Assets | $ | 189,000 | $ | — | ||||
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A comparison of the federal statutory income tax rates to the Bank's effective income tax rates follow:
| | 2000 | 1999 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| | Amount | Rate | Amount | Rate | |||||||
| Statutory Federal Tax | $ | 254,000 | 34.0 | % | $ | 116,000 | 34.0 | % | |||
| State Franchise Tax, Net of Federal Benefit | 54,000 | 7.2 | % | 25,000 | 7.3 | % | |||||
| Reduction in Valuation Allowance | (211,000 | ) | (28.3 | %) | (136,000 | ) | (39.8 | %) | |||
| Other Items, net | 5,500 | 0.7 | % | (4,200 | ) | (1.3 | %) | ||||
| Actual Tax Expense | $ | 102,500 | 13.6 | % | $ | 800 | 0.2 | % | |||
Note #7 Other Expenses
Other expenses as of December 31, 2000 and 1999, are comprised of the following:
| | 2000 | 1999 | ||||
|---|---|---|---|---|---|---|
| Data processing | $ | 233,386 | $ | 198,637 | ||
| Insurance | 42,911 | 31,926 | ||||
| Marketing and business promotion | 265,281 | 190,569 | ||||
| Other professional expenses | 157,427 | 116,663 | ||||
| Office expenses | 126,665 | 118,953 | ||||
| Regulatory assessments | 45,759 | 36,869 | ||||
| Other expense | 247,649 | 212,344 | ||||
| $ | 1,119,078 | 905,961 | ||||
Note #8 Earnings Per Share (EPS)
The following is a reconciliation of net income and shares outstanding to the net income and number of shares used to compute EPS:
| | 2000 | 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Net Income | Shares | Net Income | Shares | ||||||
| Used in Basic EPS | $ | 643,834 | 626,707 | $ | 340,955 | 625,053 | ||||
| Dilutive Effect of Outstanding Stock Options | 19,890 | 24,198 | ||||||||
| Used in Dilutive EPS | $ | 643,834 | 646,597 | $ | 340,955 | 649,251 | ||||
Note #9 Stock Option Plan
At December 31, 2000, the Bank had a fixed option plan under which 187,500 shares of the Bank's common stock may be issued at not less than 100% of the fair market value at the date the options are granted. The Bank applies APB Opinion No. 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its fixed stock option plan. Had compensation costs for this plan been determined based on the fair value at the grant dates consistent
12
with the method of SFAS No. 123, the Bank's net income and earnings per share would have been reduced for 2000 and 1999 to the pro forma amounts indicated below:
| | 2000 | 1999 | ||||||
|---|---|---|---|---|---|---|---|---|
| Net Income | ||||||||
| As reported | $ | 643,834 | $ | 340,955 | ||||
| Pro Forma | $ | 534,041 | $ | 245,946 | ||||
Per Share Data | ||||||||
| Basic EPS | ||||||||
| As reported | $ | 1.03 | $ | .55 | ||||
| Pro Forma | $ | .85 | $ | .39 | ||||
Diluted EPS | ||||||||
| As reported | $ | 1.00 | $ | .53 | ||||
| Pro Forma | $ | .83 | $ | .38 | ||||
The fair value of each option granted was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions for 2000 and 1999, respectively; risk-free rate of 6.00% and 5.00%, dividend yields of 0%; volatility of 23% and 17%, and an expected life of five and six years, respectively.
A summary of the status of the Bank's fixed stock option plan as of December 31, 2000, and changes during the year ending is presented below:
| | 2000 | 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | ||||||
| Outstanding, beginning of year | 118,500 | $ | 11.85 | 71,000 | $ | 10.17 | ||||
| Granted | 16,000 | 14.00 | 51,500 | 14.13 | ||||||
| Exercised | (1,200 | ) | 10.00 | (800 | ) | 10.00 | ||||
| Cancelled | (7,800 | ) | 12.56 | (3,200 | ) | 11.88 | ||||
| Outstanding, end of year | 125,500 | $ | 12.09 | 118,500 | $ | 11.85 | ||||
| Options exercisable at year-end | 64,238 | $ | 11.66 | 39,736 | $ | 11.37 | ||||
| Weighted-average fair value of options granted during the year | $ | 4.62 | $ | 4.34 | ||||||
The following table summarizes information about fixed options outstanding at December 31, 2000:
| | Options Outstanding | Options Exercisable | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | |||||||
| $5.00 to $10.99 | 61,000 | 6.25 Years | $ | 10.00 | 37,800 | $ | 10.00 | |||||
| $11.00 to $15.99 | 64,500 | 7.27 Years | $ | 14.08 | 26,438 | $ | 14.02 | |||||
| 125,500 | 6.78 Years | $ | 12.09 | 64,238 | $ | 11.66 | ||||||
Note #10 Related Party Transactions
In the ordinary course of business, the Bank has granted loans to certain directors and the companies with which they are associated. In the Bank's opinion, all loans and loan commitments to such parties
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are made on substantially the same terms including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. The balance of these loans outstanding at December 31, 2000 and 1999, was as follows:
| | 2000 | 1999 | |||||
|---|---|---|---|---|---|---|---|
| Beginning Balance | $ | 1,640,459 | $ | 1,417,514 | |||
| Additions | 917,016 | 352,907 | |||||
| Payments | (946,030 | ) | (129,962 | ) | |||
| Ending Balance | $ | 1,611,445 | $ | 1,640,459 | |||
Note #11 Commitments
In the normal course of business, the Bank enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the statement of operations of financial position.
The Bank's exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for loans reflected in the financial statements.
As of December 31, 2000 and 1999, the Bank had the following outstanding financial commitments whose contractual amount represents credit risk:
| | 2000 | 1999 | ||||
|---|---|---|---|---|---|---|
| Commitments to Extend Credit | $ | 16,566,000 | $ | 13,442,000 | ||
| Standby Letters of Credit | 720,000 | 797,000 | ||||
| 17,286,000 | $ | 14,239,000 | ||||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Standby letters of credit are conditional commitments to guarantee the performance of a Bank customer to a third party. Since many of the commitments and standby letters of credit are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank is based on management's credit evaluation of the customer.
Note #12 Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt, corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
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average assets (as defined). Management believes, as of December 31, 2000, that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2000, the most recent notification from the Office of the Comptroller of the Currency ("OCC") categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank's category). To be categorized as well-capitalized or adequately capitalized, the Bank must maintain minimum ratios as set forth in the table below. The following table also sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
| | | | Amount of Capital Required | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Actual Capital | To Be Adequately Capitalized | To Be Well-Capitalized | |||||||||||||
| | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||
| As of December 31, 2000 | ||||||||||||||||
| Total capital to risk-weighted assets | $ | 7,086,325 | 10.93% | $ | 5,188,678 | 8.0% | $ | 6,485,847 | 10.0% | |||||||
| Tier 1 capital to risk-weighted assets | $ | 6,386,325 | 9.85% | $ | 2,594,339 | 4.0% | $ | 3,891,508 | 6.0% | |||||||
| Tier 1 capital to average assets | $ | 6,386,325 | 7.13% | $ | 3,584,400 | 4.0% | $ | 4,480,500 | 5.0% | |||||||
| As of December 31, 1999 | ||||||||||||||||
| Total capital to risk-weighted assets | $ | 6,130,491 | 11.49% | $ | 4,268,000 | 8.0% | $ | 5,336,000 | 10.0% | |||||||
| Tier 1 capital to risk-weighted assets | $ | 5,730,491 | 10.74% | $ | 2,134,000 | 4.0% | $ | 3,201,000 | 6.0% | |||||||
| Tier 1 capital to average assets | $ | 5,730,491 | 7.47% | $ | 3,068,000 | 4.0% | $ | 3,835,000 | 5.0% | |||||||
The Bank is restricted to the amount of dividends which can be paid. Dividends declared by national banks that exceed the net income (as defined) for the current year plus retained net income for the preceding two years must be approved by the OCC. The Bank may not pay dividends that would result in its capital levels being reduced below the minimum requirements shown above.
NOTE #13 Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevent market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
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Financial Assets
The carrying amounts of cash, short term investments, due from customers on acceptances, and Bank acceptances outstanding are considered to approximate fair value. Short term investments include federal funds sold, securities purchased under agreements to resell, and interest bearing deposits with Banks. The fair values of investment securities, including available for sale, are generally based on quoted market price. The fair value of loans are estimated using a combination of techniques, including discounting estimated future cash flows and quoted market prices of similar instruments where available.
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand, commercial paper, and other borrowed funds are considered to approximate fair value. For fixed maturity deposits, fair value is estimated by discounting estimated future cash flows using currently offered rates for deposits of similar remaining maturities. The fair value of long term debt is based on rates currently available to the Bank for debt with similar terms and remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments are not deemed to be material.
The estimated fair value of financial instruments at December 31, 2000 and 1999 are summarized as follows:
| | 2000 | 1999 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||
| Assets | |||||||||||||
| Cash and cash equivalents | $ | 9,543,230 | $ | 9,543,230 | $ | 9,777,734 | $ | 9,777,734 | |||||
| Interest-bearing deposits | 200,000 | 200,000 | — | — | |||||||||
| Investment securities | 20,965,648 | 20,969,508 | 18,770,794 | 18,759,400 | |||||||||
| Loans receivable | 61,200,027 | 60,977,940 | 45,385,099 | 45,400,354 | |||||||||
| Accrued interest receivable | 815,410 | 815,410 | 593,753 | 593,753 | |||||||||
| Federal reserve bank stock | 171,950 | 171,950 | 163,250 | 163,250 | |||||||||
| Liabilities | |||||||||||||
| Non-Interest bearing deposits | 21,397,548 | 21,397,548 | 15,977,491 | 15,977,491 | |||||||||
| Interest bearing deposits | 68,552,456 | 68,557,382 | 54,687,441 | 54,687,179 | |||||||||
| Accrued interest payable | 86,671 | 86,671 | 50,543 | 50,543 | |||||||||
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Board of Directors and Stockholders of Coast National Bank
San Luis Obispo, California
We have audited the accompanying statements of financial condition of Coast National Bank as of December 31, 2000 and 1999, and the related statements of income, changes in stockholders' equity, and cash flows for the years ended December 31, 2000 and 1999. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coast National Bank as of December 31, 2000 and 1999, and the results of its operations and its cash flows for the years ended December 31, 2000 and 1999, in conformity with generally accepted accounting principles.
/s/ Vavrinek, Trine, Day & Co., LLP
Vavrinek, Trine, Day & Co., LLP
Laguna Hills, California
January 3, 2001
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| Directors | ||
| Jack C. Wauchope | Chairman of the Board President/Chief Executive Officer Coast National Bank | |
| Marilyn Britton | Executive Director San Luis Obispo County Farm Bureau | |
| Dario Domenghini | Rancher | |
| Jack Guhring | Golden State Phone & Wireless Chairman, Investment Committee | |
| James M. Kaney | Businessman/Investor Chairman, Loan Committee | |
| Michael A. Lady | Businessman/Investor Mayor, Arroyo Grande | |
| Gene D. Mintz | Accountant Chairman, Audit Committee | |
| Ronald R. Olson | Certified Public Accountant | |
| Jack Robasciotti | Vice Chairman Coast National Bank Chairman, Compliance/CRA Committee | |
| Thomas J. Sherman | Executive Vice President Chief Credit Officer Coast National Bank | |
| Dan Wixom | Wixom Trucking/Rancher Chairman, Personnel Committee | |
Administration | ||
| Jack C. Wauchope | President/Chief Executive Officer | |
| Jack Robasciotti | Vice Chairman | |
| Thomas J. Sherman | Executive Vice President Chief Credit Officer | |
| Susan DuMelle | Vice President/Compliance Officer Operations Administrator | |
| Julie A. Joslin | Vice President/Controller Assistant Secretary | |
| Leah Pauly | Vice President/Credit Administrator | |
| Mary Harlan | Assistant Vice President Network Administrator | |
| Cindy Magliari | Assistant Vice President Senior Accountant | |
| Stephanie A. Ragsdale | Assistant Vice President/Human Resources | |
San Luis Obispo Office Main Office | ||
| Charles E. Fruit | Senior Vice President Branch Manager | |
| Cynthia Jensen | Assistant Vice President Senior Operations Officer | |
| Lisa Mumford | Assistant Vice President Loan Officer | |
| Denise M. Layaye | Loan Officer | |
Arroyo Grande Office | ||
| Donald G. Parker | Senior Vice President Branch Manager | |
| Tommi Lovern | Assistant Vice President Loan Officer | |
| Stephanie R. Schwan | Assistant Vice President Loan Officer | |
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| Kirsten Behrmann | Operations Officer | |
Morro Bay Office | ||
| Richard D. Bardini | Regional Vice President Branch Manager | |
| Patricia Albertini | Vice President Assistant Manager | |
Los Osos Office | ||
| Lawrence R. Womack | Vice President Branch Manager | |
Small Business Lending Center | ||
| Davina Saunders | Senior Vice President Manager | |
| Susan Rode | Assistant Vice President Loan Officer | |
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[COAST NATIONAL BANK LOGO]
SAN LUIS OBISPO
Main Office
486 Marsh Street
San Luis Obispo, CA 93401
(805) 541-0400
Administration
553 Higuera Street
San Luis Obispo, CA 93401
(805) 541-0400
ARROYO GRANDE
1199 Grand Avenue
Arroyo Grande, CA 93420
(805) 473-6560
MORRO BAY
948 Morro Bay Boulevard
Morro Bay, CA 93442
(805) 772-6800
LOS OSOS
1193 Los Osos Valley Road
Los Osos, CA 93402
(805) 528-6780
[Member FDIC LOGO]
